DeFi And The Future Of Cryptocurrency

DeFi And The Future Of Cryptocurrency

Ever since decentralized finance emerged, it has become a landmark achievement in the history of the crypto ecosystem. The potential for interoperable and liquid financial services without the need for centralized mediators offers immense potential in lowering the barriers of entry into the financial markets and enabling seamless value exchange.

Decentralized finance (DeFi) refers to an umbrella term for several different financial applications in cryptocurrency or blockchain that is aimed at disrupting and eliminating financial intermediaries. Decentralized finance is similar to blockchain, the financial technology behind bitcoin, which allows several entities to hold a copy of a history of transactions, implying that it is not centralized or controlled by a single, central source.

There is no argument that centralized systems and human gatekeepers may invariably impede or limit the speed and maybe sophistication of transactions while allowing the users to have relatively less control. The unique ability to expand the use of blockchain from simple value transfers to more complex financial ones makes Defi different.

Decentralized finance in its core is based on blockchain technology. Decentralized finance makes use of components known as smart contracts. Smart contracts are forms of automated agreement that do not require a middle man to be done but can be accessed by any user who is connected to the Internet using a computer.

Technological usage in financial services is not a new phenomenon. Nowadays, many transactions that are done in the bank and other financial institutions are done with the aid of technology. But using technology for financial transactions is limited and restricted as the technology becomes a facilitator of that transaction.

Organizations have to contend with the navigation of the legalese of jurisdictions, extremely competitive financial markets, among other things to make a transaction possible. But with Defi, its basic and common software protocols, and blockchain to build them on, Defi elevates and places technology in the center and even the front of financial transitions in the financial services industry.  The decentralized finance scope is much wider although commonly placed in the purview of cryptocurrencies and blockchain.

Decentralized finance removes the need for an intermediate or centralized model and allows for the availability of financial services to anyone in any place irrespective of their religion, age, race, and gender.

Decentralized Apps and services are built on public blockchains and they either imitate existing offering that was created on the platform of common technology standards or they offer new and unique service that is specially designed for the decentralized finance ecosystem.

Also, the Decentralized Finance application allows users to have more control over their money using trading services and their wallets that are built to cater to the individual needs of these users.

History Of Decentralized Finance or Defi

In the past, humans traded and bartered between themselves for goods and services. But, as humans grew and evolved, as economies evolved and technology came into play, Currency was invented as a means of exchange to make the exchange of goods and services easy. As a result of this, hard metal coins heralded innovation and engendered a better economic level around the world.

In times past the issuance of currencies has been carried out by central authorities. These actions invariably underpin the economy and gave an almost absolute power and control of these central authorities over the people who trust them.

But as human nature, this trust has been broken time and time again causing the people to question the ability of these central authorities to manage their money. As a result of this, decentralized finance was developed to mitigate this problem and to create a financial system that is open to everyone and lessens the need to rely on or trust a central authority.

It has been argued amongst experts that Decentralized finance began in 2009 with the launch of the cryptocurrency- Bitcoin. Bitcoin as many have come to know was the first peer-to-peer digital money that was developed on top of the blockchain network.

The concept of using blockchains to bring in a revolution and transformation to the traditional financial system became an important step to follow next in the decentralization of the traditional financial systems. This idea and concept were made possible by the launch of ethereum and, more specifically, smart contracts in 2015.

As a second-generation blockchain, Ethereum was able to make the most out of this technology with the financial industry. It helps and encourages organizations, enterprises, and businesses to build and launch a project that is formed on the Defi ecosystem.

Decentralized finance created abundant opportunities to bring about transparency and a robust financial system that no central authority controls. However, 2017 was the turning point for financial applications as they were able to carry out various financial functions as opposed to just the transfer of money.

Challenges Plaguing Centralized Finance

It is imperative to note that financial markets through efficient and effective services can enable great ideas and drive the prosperity of society. However, this is a problem because of the power of the central authorities in these markets. The power is centralized. Anybody who trades and/or invests in the traditional centralized market or financial system relinquishes his money or assets to banks and financial institutions who are intermediaries.

In the past, incidents have occurred where financial institutions and banks failed to see the risk in the market. For instance, the financial crisis of 2008. It is without a doubt that when a central authority is in charge of the money, there is accumulated risk at the center which in turn endangers the entire system.

Cryptocurrencies such as Bitcoin and Etherum, which were initially created to allow individuals complete control and ownership over their assets, were only decentralized when the required storage and issuance. Up until the development of Smart contracts that enabled Decentralized finance, providing access to a broader set of financial instruments was a challenge.

In conclusion, the Decentralized finance ecosystem is rapidly gaining acceptance and usage over the traditional financial system. Despite its problems which are inevitable especially when operating on the bleeding edge of innovation, the decentralized finance world is on the rise to greatness and prosperity. It is now a matter of time before Defi will shape the power to build financial services and take over the traditional financial system.